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Gold...The Ultimate Triple-A Asset

Monday, August 31, 2009

Nomura Gets 6 Years Free Rent For London HQ - Canadian Pensioners Probably Not Happy......

The landlord is Oxford Properties ( the property arm of the Ontario pension fund in combination with UBS )....The 365,000 active and retired members of one of the biggest Canadian pension funds are probably not happy....... The unfavourable CAD/GBP Chart isn´t making things better..... And with stories like this it is only going to get worse...... For more "good" news on the pension front i recommend the blog Pension Pulse.....Unfortunately the situation in Germany isn´t any better.....I have listened to the latest conference call from Thyssen Krupp ( one of the largest steel producers and close to a junk rating ) & the CFO ( former CFO from überlevereged CONTI..... ) said the ( analogous ) following ( and he was not kidding! )..... "Good that our pension plan is still underfunded by over € 6 billions..... If we would have funded it in the past few years the deficit would be much bigger".... Probably the best spin attempt i´ve heard so far... CHUZPAH!

"The Watermark Place development is another important step in the expansion of Oxford's global investment platform,demonstrating the skills, capabilities, and reach of Oxford and its investment professionals. We are excited about our relationship with UBS - a world-class investment manager and a great like-minded partner." Andrew Trickett, Vice President of Corporate Development & Investment, added "this development represents a unique investment opportunity for Oxford and an outstanding addition to London's office market.

Japanese investment bank Nomura has secured a rental deal on its new London headquarters allowing free rent for almost six years, the Financial Times reported, citing the terms of a deal to be announced on Tuesday.

The FT said the bank will confirm plans to move its UK business, including the staff taken on as part of the Lehman Brothers acquisition, into a new office development on the Thames.

Up to 4,000 banking staff will move into the 12-storey Watermark Place next year, many relocating from the former Lehman Brothers building in Canary Wharf.

The landlord, Oxford Properties, is the property arm of an Ontario pension fund and UBS

According to IFD, UK commercial properties values have been declining fast with peak to current declines of around 45%, with major declines noted in all major segments - retail, offices and industrials

At the same time the amount of available floor space for occupation increased at the fastest pace since 1999 in all regions with the exception of London (Chart 2) and thevalues of inducements rose at its fastest pace since the survey’s history in 1999. Collectively this implies that an upward correction in prices in the foreseeable future is unlikely.

Be careful if you´re still long this market...... The risk/reward ratio isn´t quite "favourable" right now..... If you´re considering to short this market i agree with Jesse ( even if it is very tempting) .....

For some perspective on the current stock market rally and how it compares the 1929-1932 bear market (which also included bank failures, bankruptcies, severe stock market declines, etc.), today's chart illustrates the duration (calendar days) and magnitude (percent gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). For example, the bear market rally that began in November 1929 lasted 155 calendar days and resulted in a gain of 48%. As today's chart illustrates, the duration of the current Dow rally (hollow blue dot labeled you are here) is longer than any that occurred during the 1929-1932 bear market.As for magnitude, only the November 1929 bear market rally resulted in a better performance than what has occurred during the current rally to date.

News from 1930 Daily summary based upon my reading of the Wall Street Journal from the corresponding day in 1930

There's a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly intrenched.”

Fed. Reserve seen continuing easy credit policy pursued since start of year. Some concern that increased reserve credit “will flow into speculative channels,” but this doesn't seem to have happened much yet.

The central bank sector had a dampening impact on supply - net purchases of 14 tonnes were recorded in Q2’09 compared to net sales of 69 tonnes in Q2’08, the figures indicating the first net purchase by central banks for a considerable length of time.

The precious-metals market took notice for all the right -- but not-so-obvious -- reasons when China announced last week that it ramped up its gold reserves by 76% in the last six years.

Last week, China announced that the amount of gold in its reserves has climbed to 1,054 tons from 600 tons in 2003

It also asked the International Monetary Fund to sell its entire 3,217 tons reserve

China's gold reserves are worth almost $31 billion -- about 1.6% of its total foreign- exchange reserve holdings, and gold as a percent of the country's total reserves has actually declined since 2003, according to Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter.

To put that into better perspective, if China was to purchase the IMF's reserves of 3,217 tons at a price of $1,000 per ounce, the price would be $103 billion, according to Kosares.

“Our forecast is for moderate but positive growth going into next year. We think that by the spring, early next year, that as these credit problems resolve and, as we hope, the housing market begins to find a bottom, that the broader resiliency of the economy, which we are seeing in other areas outside of housing, will take control and will help the economy recover to a more reasonable growth pace.”

Ben Bernanke, Federal Reserve Chairman

On Friday, investors took great cheer in an optimistic statement by Ben Bernanke suggesting good prospects for economic growth ahead.

We might be inclined to place a sliver of credibility in Chairman Bernanke's assessment – if not for the fact that the quote above wasn't from last week at all, but rather, hails back to November 8, 2007, just before the recent recession began.

You might recall that the S&P 500 was pushing 1500 at the time. The implosion of the global credit markets was still just a slight rumble

Solving economic problems, to our Fed Chairman, is as easy as throwing money out of helicopters. Not surprisingly, throwing money out of helicopters has been the basic core of his strategy during this crisis.

This does not involve complex thought about debt restructuring, moral hazard, incentives, equitable distribution of resources, or other factors.

All it requires is the three second tape playing in Bernanke's head - "We let the banks fail in the Great Depression, and look what happened." And then the tape repeats.

Never mind that the cause of the upheaval was not the failure of banks per se, but the disorganized Lehman-style failure of banks. The tape isn't long enough to encompass such nuances.

Ben Bernanke (like Tim Geithner and his predecessor Hank Paulson), shows no hesitation in diverting the real resources of the American public to defend and compensate the bondholders of mismanaged financial companies who made reckless loans and who should have (and equally important, could have) been expected to write down principal or swap debt for equity as an alternative to receivership.

This is not decisiveness. It is timidity and poor stewardship. Worse, the underlying problems are not healed - only band-aided temporarily by a flood of public money.

Unfortunately, the resources used in the recent bailout were not just free money tossed out of a helicopter. Only a partial-equilibrium economist thinks that way.

No, this was an allocation of trillions of dollars of real resources that could be spent improving access of poor families to health care, finding cures for life-changing diseases, providing better education, and reversing the crowding-out of productive private investment.

A public servant willing to act this carelessly with the resources entrusted to him, and so strongly in defense of fellow bankers, frankly does not deserve the job. Most likely, we will face the same credit issues a few quarters from now, given that the lull in the adjustable-rate reset schedule is near its end. We continue to expect a fresh acceleration of credit losses as we enter 2010. It would be best if we faced these challenges with more thoughtful leadership.

> Another Bernanke quote via Rosenberg

Then again, he told us in June 2008 that “although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.”

Nice call. Those supporting Mr. B's reappointment should take this forecast into consideration. It's not quite like Chamberlain's “peace in our time”, but it's not that far off either.

> I have never heard the usually calm Farrel ranting...... I like it......

(MarketWatch) -- At last week's annual Jackson Hole meeting of Fed execs, Boss Ben Bernanke's braggadocio about saving the world from another Great Depression had the feel of an egomaniacal dictator trying to cement his legacy in history.

Any good behaviorist would tell you Bernanke's got some dangerous biases isolating him from reality (remember two years ago when he was denying the meltdown). His brash claims and radical, secretive policies present a grave danger to American capitalism and democracy.

He was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles.

He was the intellectual champion of the “global saving glut” defencethat exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia.

He is cut from the same market libertarian cloth that got the Fed into this mess.

Finally, and this is a broader point, Roach argues that it is too soon to grant Bernankeas having saved the day: “It would be the height of folly to reward Mr Bernanke for the recovery that never stuck. “

That said, I think Fed policy under Bernanke has been terrible. The Greenspan interventions he supported inflated the largest credit bubble in 80 years; the de-leveraging that needs to happen to correct the damage has been delayed indefinitely by Bernanke’s own interventions.

His supporters say he averted a second Great Depression. I disagree. He’s merely delayed it.

The liabilities of the financial and consumer sectors haven’t gone away, they’ve merely been absorbed by the public balance sheet. This is as much Hank Paulson’s and Tim Geithner’s fault as it is Bernanke’s. I’m not thrilled with their leadership either.

Friday, August 21, 2009

Prime Time Humor.....

Delinquency cure rates refer to the percentage of delinquent loans returning to a current payment status each month. Cure rates have declined from an average of 45% during 2000-2006 to the currently level of 6.6%. It is important not only to observe total roll rates, but delinquency cure rates as well, according to Managing Director Roelof Slump.

In addition to prime cure rates dropping to 6.6%, Alt-A cure rates have dropped to 4.3%, from an average of 30.2%, and subprime is down to 5.3% from an average of 19.4%. 'Whereas prime had previously been distinct for its relatively high level of delinquency recoveries, by this measure prime is no longer significantly outperforming other sectors,' said Slump.

The Bank of England should finance a further £50 billion of asset purchases by the creation of central bank reserves, implying a total quantity of £175 billion of such asset purchases. The Bank should seek to complete the additional purchases within the next three months.

Six members of the Committee (Charles Bean, Paul Tucker, Kate Barker, Spencer Dale, Paul Fisher and Andrew Sentance) voted in favour of the proposition. Three members of the Committee (the Governor, Tim Besley and David Miles) voted against, preferring to increase the size of the asset purchase programme by £75 billion to a total of £200 billion.

Yep, Mervyn King, together with Besley and Miles wanted the rate of monetary stimulus increasing, not just extending at the current rate of £50bn-a-quarter. That was good for half a cent off sterling versus the dollar and a third of a cent v the euro on Wednesday morning. Gilts, of course, spiked higher.

The extraordinary thing about UK monetary policy today is how close it is shadowing fiscal policy. This year, the Bank of England printing presses will produce roughly the same amount of new money as this year's fiscal deficit. Or to put it more bluntly, the private sector have, on a net basis, stopped lending money to the government.

> The estimated issuance is based on this "optimitic" forecast.... Especially compared to the IMF, OECD, Bloomberg etc..... No surprise to see the BOE also out of touch....... Good to know that at least this leads to a "review" of the AAA rating.... Hallelujah! :-) After watching this & this chart it should be clear to anybody not working at an rating agency that an AAA is more or less history.....

The Chancellor has forecast that the economy will contract by 3.5% in 2009, followed by GDP growth of 1.25% in 2010 and 3.5% in 2011. He sees long-term trend growth at 2.75%

> While i´m still in the deflation camp for some time to come but i´m pretty sure down the road the central banks will once more cause massive inflation ( read Inflation: What the heck is it? from Mish). If you want to know the details why i think this will happen i would like to refer to the podcast with Chris Martenson. Couldn´t have said it better.....H/T Pension Pulse.... One of many reason why i´m a "Goldbug" ( regardless of the timing - H/T Zero Hedge). The best "insurance"( relatively speaking ) you can buy to protect yourself from the "wisdom" of King, Bernanke & Co.. :-)

Another View: Tunneling to True Profit in China DealbookMark Dixon, a founder of the mergers and acquisitions adviser the1.com, which is active in mainland China, unwittingly unearthed some Chinese accounting tricks while valuing a local company

> Not a listed company / keine börsennotierte Firma

What with the world still reeling from the domino effect that Lehman Brothers’ balance sheet had on financial markets, the exposure of accounting frauds like the one at the Madoff fund and the final throes of the expenses scandal in the British Parliament, a trip to China promised to be a breath of fresh air in this atmosphere of fishy finances.

Hired by a client to help with an acquisition in China, I was given the job of deciding how much the buyer should pay for the business. That meant first calculating an accurate profit for the target company, its so-called normalized profit.

In the West, the process involves making a few small adjustments caused by things like no longer having to pay salaries to sellers if they aren’t going to stay at the company and other nonrecurring items. But it shouldn’t mean having to recalculate the entire income statement.

Generally Accepted Accounting Principles are not generally accepted in China. This is partly because the Chinese have their own accounting rules and partly because rules are for breaking

And it’s not just that some company owners are trying to confuse the tax authorities. It’s that, when they do so, they end up also confusing themselves.

The gymnastics they do with revenues and costs are so impressive that the Beijing Olympics should have added an event especially for accountants.

Markets with developed gray economies, like Italy, are well known for the practice of keeping one set of accounts for the government and another for the owners so they know what’s really going on. Chinese companies often dispense with the second set, hence the confusion. That’s probably true of other “developing gray economies.” .....

> At least they try to understate the true earnings power..... The opposite is true for almost every listed company out there ( except when it comes to their taxable profit )..... Go and read the entire piece..... Nice insight on Chinese mentality....

WM 2009 Berlin - World Record 100m - Usain Bolt - 9.58 HQ

Lightning Bolt EconomistThe men's 100 metres record is smashed by the biggest margin in modern timesIT WAS another big occasion and yet another world record for a Jamaican sprinter, Usain Bolt, on Sunday August 16th. At the athletics World Championships he broke the 100 metres sprint record again, taking his own time down to 9.58 seconds from 9.69 seconds, set a year ago at the Beijing Olympics. This is the most the record has fallen since electronic timing was first used in 1968. In the century or so since official records began a little more than a second has been shaved off the quickest time for the sprint, an improvement of 9%.

"By the way, Bolt’s start in the final, while good, wasn’t his best at this year’s meet. Consider the following chart, which shows reaction times out of the blocks in the 100m final. Of the 8 sprinters, Bolt was third-slowest, making the outcome even more remarkable."

Sunday, August 16, 2009

Bad, Bad Assets.....

Bad, Bad Assets Floyd NorrisThe F.D.I.C. announced the seizure of Colonial Bank and the transfer of the deposits to BB&T, a regional bank based in North Carolina. (As an aside, I’ll note that Colonial only wanted to expand into fast-growing areas, and never chose to enter North Carolina. Tortoise and Hare?)

You can learn all you really need to know about the assets Colonial amassed from the breakdown of what will happen to them, although details are sparse.

1. The F.D.I.C. gets $3 billion in assets that BB&T did not want at all.2. BB&T gets $7 billion of assets.3. BB&T gets another $15 billion of assets to manage, but the F.D.I.C. will share losses on them, in ways that are not yet disclosed.

That means that of the $25 billion in assets Colonial had, only 28 percent of them were deemed by BB&T to be worth taking on without any protection. And 12 percent were deemed not worthy of being taken under any terms.

At three of the five banks that failed Friday, increasing the total to 77 so far this year, the financial hit to the agency's deposit-insurance fund is expected by the FDIC to be about 50% of their assets.

Below is a graph showing the DIF capital as a percentage of total bank deposits insured by the FDIC. Note that this graph is based on the old insurance limit with a maximum coverage of $100.000/account. This limit has been changed to cover up to $250.000/account until January 1st 2014. Estimates say that the change increases the deposits covered under FDIC insurance to approximately $6 trillion in total.

The current reserve ratio of 0.014%1 strongly indicates how bad this crisis has affected U.S financial institutions. However, this is not the entire story. If we take a closer look at non-current loans and charge-offs from banks one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q109 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada the U.S still has banking failures in the thousands to face before the crisis is over. In turn that should result in the FDIC requesting the pre-approved funding signed by the Congress in May 2009, including $100 billion from the U.S Treasury Department.

Thursday, August 13, 2009

"Reported Earnings vs Operating Earnings"

Thank god that real earnings don´t matter...until they matter..Some still call the market "cheap"...... No problem with the right pro forma ( What are pro forma earnings? ) model/formular.... Havn´t heard the word GAAP for a long time..;-)

While reported earnings are based on strict accounting rules, adjusted operating earnings are at the discretion of companies because there is no defined set of exclusions

Neither measure is perfect but with adjusted operating earnings, exclusions are currently so large that information about the true state of companies (and therefore the market as a whole) is being excluded.

These exclusions have reached the level where the gap between adjusted operating earnings and reported earnings is so wide that they deliver different messages on the state of US corporates.

Today reported earnings per share for the S&P 500 companies gathered by Standard & Poor's is $7.2 per share, down 91 per cent from the 2007 peak.

On an adjusted operating basis, earnings are $61.2, down 34 per cent from the 2007 peak.

This $54 gap is a record.

How has this come about? Much of the difference between adjusted operating earnings and reported earnings is caused by massive writedowns in the financial sector. However, outside the financial sectors write-offs are also at record highs as corporates are eager to toss out impaired assets during periods of stress.

Furthermore, when looking at adjusted operating earnings, it seems that most US corporates managed to beat their analyst estimates thanks to production and job cuts.

Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. ( see Regions Form 10-K via Zero Hedge)

The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.

So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”

While disclosures of this sort aren’t new, their frequency is. This summer’s round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board’s rules.

The timing of the revelations is uncanny. Last month, in a move that has the banking lobby fuming, the FASB said it would proceed with a plan to expand the use of fair-value accounting for financial instruments. In short, all financial assets and most financial liabilities would have to be recorded at market values on the balance sheet each quarter, although not all fluctuations in their values would count in net income. A formal proposal could be released by year’s end.

Recognizing Loan Losses

The biggest change would be to the treatment of loans. The FASB’s current rules let lenders carry most of the loans on their books at historical cost, by labeling them as held-to- maturity or held-for-investment. Generally, this means loan losses get recognized only when management deems them probable, which may be long after they are foreseeable. Using fair-value accounting would speed up the recognition of loan losses, resulting in lower earnings and reduced book values.

While Regions may be an extreme example of inflated loan values, it’s not unique. Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

Widening Gaps

The disparities in those banks’ loan values grew as the year progressed. Bank of America said the fair-value gap in its loans was $44.6 billion as of Dec. 31. Wells Fargo’s was just $14.2 billion at the end of 2008, less than half what it was six months later. At Regions, it had been $13.2 billion.

Other lenders with large divergences in their loan values included SunTrust Banks Inc. It showed a $13.6 billion gap as of June 30, which exceeded its $11.1 billion of Tier 1 common equity. KeyCorp said its loans were worth $8.6 billion less than their book value; its Tier 1 common was just $7.1 billion.

When a loan’s market value falls, it might be that the lender would charge higher borrowing costs for the same loan today. It also could be that outsiders perceive a greater chance of default than management is assuming. Perhaps the underlying collateral has collapsed in value, even if the borrower hasn’t missed a payment.

The trend in banks’ loan values is not uniform. Twelve of the 24 companies in the KBW Bank Index, including Citigroup Inc., said their loans’ fair values were within 1 percent of their carrying amounts, more or less. Citigroup said the fair value of its loans was $601.3 billion, just $1.3 billion less than their book value. The gap had been $18.2 billion at the end of 2008.

If nothing else, today’s fair-value gaps highlight the arbitrariness of book values and regulatory capital. Banks already have the option to carry loans at fair value under the accounting rules. For the vast majority of loans, most banks elect not to, on the grounds that they intend to keep them until maturity and hope the cash rolls in.

Consequently, the difference between being well capitalized and woefully undercapitalized may come down to nothing more than some highly paid chief executive’s state of mind.

Fair-value estimates in the short-term can be a poor indicator of an asset’s eventual worth, especially when markets aren’t functioning smoothly.

The problem with relying on management’s intentions is that they may be even less reliable.

At least now we’re getting some real numbers, even if you have to dig through the footnotes to get them.

The S&P 500 has rebounded 49% from those March 9 lows. Imagine how abnormal a 49% rally over a five-month span is — it’s unprecedented back to the 1930s. In the last cycle, it didn’t happen until February 2004 — 18 months into that bull phase where again there was tremendous policy stimulus and an oversold low to climb out of.

In addition, household credit was expanding rapidly. Even coming into what was a secular bull market in 1982, it took a good seven months to rally 49%, and that was with the benefit of a V-shaped economic recovery.

Going back to 1950, it has taken an average of around 18 months for the market to rebound 49% from a recession trough, not five months as has been the case thus far.

Let’s examine what the macro landscape usually looks like at that magical +49% point in the equity market rally:

• Real GDP had expanded on average by 4.5%• Employment rebounded an average of 850k• The ISM manufacturing index had firmed to an average of 56.2 (the lowest print by this juncture was 53.9)• Corporate profits had recovered 12%• Bank lending rose an average of 5%

In other words, the market is way ahead of itself, because, as of the latest data points during this 49% rally:

• Real GDP is trying to make a cycle low• Employment is trying to make a cycle low• The ISM is off the low but still sub-50, at 48.9• Corporate profits are still trying to make a cycle low• Bank lending is still trying to make a cycle low

We have never before witnessed a stock market rally of this magnitude over such a short time frame and absent anything more than tentative signs of economic improvement.

The only rally of this magnitude was the wild bear market rally ride in 1930, which was followed by a resumption of the decline that finally bottomed 82% lower in 1932.

A VERY SPECULATIVE STOCK MARKETThis is the most speculative momentum-driven equity market since the early 1930s. Make no mistake, the economy is getting better but most of the diffusion indices are still below the 50 cutoff and many of the economic indicators are still in negative growth terrain

But what we have on our hands is a jobless, revenue-less, income-less, profitless and consumer-less recovery. It’s a one of a kind.

The equity market tends to bottom 3-6 months before the recession ends; normally it is four months. The S&P 500 bottomed in March, and we are now four months into this rally and while the media have declared the recession to have ended, none of the four classic ingredients that go into making that call have yet to bottom.

Hence, Mr. Market may well be way ahead of himself on this one. No doubt that the market was priced for extremely bad news at those March lows, but let’s face it, the news turned out to be pretty bad, especially for those 2.2 million people who lost their jobs since that time. That’s more than the entire March 2001-June 2003 down-cycle — in just five months.

> Just today three major German financial newspapers ( FT Germany, Handelsblatt und Welt ) had all bullish stories why stocks have room to climb higher.....At least they didn´t have their stories on the cover.... This would have triggered a perfect signal to short the market....;-) The FAZ seems to be regular readers of Zero Hedge and is therefore less "euphoric"......You really have to be brave to be long this market....... The risk/reward isn´t quite "balanced" right now......

Rosenberg also points out that the 46% rally in 101 days is unmatched dating back to 1933. I suppose the rally could continue given the 1933 rally lasted 249 days taking the stock market up 172%. However, I would not recommend playing for it.

Rosenberg suggests there will be no recovery without the consumer. I suggest there will be no recovery in consumer spending, discounting of course "free money" programs like "cash for clunkers".

Of course this all depends on the definition of "recovery". At best, I think we have a "Recoveryless Recovery" before the economy slips back into a double or triple dip recession. Regardless, the stock market is priced for perfection while the odds of perfection are close to zero.